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After a drought, signs of new growth in the oilsands

In March, with oil prices skidding under $40 US a barrel, MEG Energy quietly posted a notice of its application to build a new oilsands project south of Fort McMurray. Is this a sign of new life in the oilsands?

MEG Energy applies for new oilsands project

MEG Energy has applied to develop a new oilsands project despite persistently low oil prices. (MEG Energy)

In March, with oil prices skidding under $40 US a barrel, MEG Energy quietly published a notice of its application to build a new oilsands project south of Fort McMurray. The May River project isn't huge — it will top out at approximately 164,000 barrels per day — but it's important as a green shoot in Alberta's beleaguered energy industry.

"It's very positive in the sense that they're still investing money into future growth," said Kevin Birn, an oilsands analyst with IHS.

MEG is a relatively small player in the oilsands, with 80,000 barrels of production per day. Like all producers, it has struggled through the downturn, but the company turned a profit in the first quarter of 2016, earning $130 million as it got control over its costs. This in a quarter when oil prices hit a low of $26 US a barrel.

An application is not an investment

An application is not an investment decision, though. It's the very first step in a regulatory process that can takes years. No oil would be produced at May River until, at best, the 2020s.

"This isn't the point where they have to commit a large amount of capital," said Joe Gemino, an energy analyst with the investment research firm Morningstar.

"In order for that to happen, there needs to be sustained higher oil prices and the company needs to continue to drive down some of the capital and operating costs, which would make projects more economical at lower prices."

Oilsands construction set to slow

It's been nearly two years since the oil downturn began. In June 2014, oil was trading at $103 US a barrel, a level that seems impossibly distant now. In the past 24 months, billion of dollars in oilsands development have been put on hold — projects that were already approved by regulators but hadn't begun construction.

That means that in less than two years, unless some of those projects are revived, construction will essentially stop in the oilsands.

"In 2015, we had nearly a million barrels under construction in the oilsands," said Birn. "That would take two to three  years to be completed and turned on and then ramped up for two to three years. That's why growth is fairly predictable to 2020."

Birn said that the ongoing construction has provided a buffer to Alberta and Canada's economy, but looking to 2018, there are no projects slated to begin construction, at this point.

"That could be the first year that you don't have construction in the Canadian oilsands in as long as I can remember."

Prices need to recover before money is spent

There are many projects that could easily be brought back to life before 2018 if a few conditions are met. The price of oil is obviously the biggest variable, with an approved export pipeline in second place.

Oil futures traders are skeptical about future prices — they have oil trading at just over $50 us a barrel in late 2018. Royal Bank is calling for $70 US crude, while TD Bank is calling for $65 oil. It's anyone's guess as to whether a pipeline will be under construction by that point.

"Prices need to exceed the break-even threshold," said Birn. "And producers need to feel confident about the the direction of future prices."

So while the MEG application is indeed a welcome green shoot, it's one that may not have the chance to grow in the near term.

"Just because the paperwork is going through doesn't mean this even happens," said Gemino. "Or it could be 2023 or 2030, there's so much uncertainty around it."

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